1. Description of the Plan (continued)
received on allocated and unallocated shares of Stanley Stock and participant and Company contributions are used to make payments under the loans. If dividends on the allocated shares are applied to the payment of debt service, a number of shares of Stanley Stock having a fair market value at least equal to the amount of the dividends so applied are allocated to the Choice Accounts of participants who would otherwise have received cash dividends.
The fair market value of shares of Stanley Stock released from the Unallocated Fund pursuant to loan repayments made during any year, along with contributions made during that year that are not used to repay the loan may exceed the total of participant contributions, matching and Cornerstone allocations (other than allocations attributable to forfeitures or to amounts held in the temporary account (See Note 4)), and cash dividends on allocated shares of Stanley Stock applied to the payment of a loan for the year. If that occurs, such excess value is allocated in shares of Stanley Stock, based on relative compensation, among the participants who are employed by the Company on the last day of the year and who are not covered by a collective bargaining agreement or by the Pension Plan for Hourly Paid Employees of The Stanley Works.
The trust agreement governing the Plan provides that the trustee will vote the shares of Stanley Stock in the Stanley Stock Fund attributable to a participant's Choice Account in the Plan in accordance with such participant's directions. The trust agreement governing the Plan provides that, if the trustee does not receive voting instructions with respect to shares of Stanley Stock in the Stanley Stock Fund attributable to a participant's Choice Account in the Plan, the trustee will vote such shares in the same proportion as it votes the allocated shares for which instructions are received from Plan participants. The trust agreement also provides that shares in the Unallocated Fund are to be voted by the trustee in the same proportion as it votes the shares of Stanley Stock in the Stanley Stock Fund attributable to Choice Accounts for which instructions are received from Plan participants. Therefore, by providing voting instructions with respect to shares of Stanley Stock in the Stanley Stock Fund attributable to a participant's Choice Account in the Plan, a Plan participant will in effect be providing instructions with respect to a portion of the shares in the Unallocated Fund and a portion of the shares of Stanley Stock in the Stanley Stock Fund attributable to Choice Accounts in the Plan for which instructions were not provided as well. The foregoing provisions are subject to applicable law which requires the trustee to act as a fiduciary for Plan participants. Therefore, it is possible that the trustee may vote shares of Stanley Stock in the Stanley Stock Fund attributable to Choice Accounts in the Plan for which it does not receive instructions (as well as shares held in the Unallocated Fund) in a manner other than the proportionate method described above if it believes that proportionate voting would violate applicable law.
The Stanley Works reserves the right to amend or terminate the Plan at any time. Upon the termination of the Plan, the interest of each participant in the trust fund will become vested and be distributed to such participant or his or her beneficiary at the time prescribed by the Plan terms and the Internal Revenue Code.
The Plan sponsor maintains separate accounts for each participant. Such accounts are credited with each participant's contributions, matching allocations, Cornerstone Account allocations, related gains, losses, dividend income, and loan activity.
At December 31, 2003 and 2002, benefits payable to terminated vested participants who had requested their payments were $258,204 and $928,502, respectively.
2. Significant Accounting Policies
The Plan is accounted for on the modified cash basis, as the carrying amounts of all investments are adjusted to fair value. The Plan investments consist predominantly of shares of Stanley Stock. Stanley
Stanley Account Value Plan
Notes to Financial Statements (continued)
2. Significant Accounting Policies (Continued)
Stock is traded on a national exchange and is valued at the last reported sales price on the last business day of the plan year. Mutual funds are stated at fair value which equals the quoted market price on the last business day of the plan year. Short-term investments consist of short-term bank-administered trust funds which earn interest daily at rates approximating U.S. Government securities; cost approximates market value.
The assets of the Plan are held in trust by an independent corporate trustee, Citibank, N. A. (the "Trustee") pursuant to the terms of a written Trust Agreement between the Trustee and the Company.
Investments representing 5% or more of the fair value of net plan assets are as follows:
| | | | | | | | | | |
| | | December 31, 2003 | | December 31, 2002 |
| The Stanley Works - common stock | | $ | 450,125,584 | | | $ | 424,117,199 | |
| NTGI Russell 3000 Index Fund | | $ | 30,348,870 | | | $ | 19,281,275 | |
|
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that can affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Dividend Income
Dividend income is accrued on the ex-dividend date.
Gains or Losses on Sales of Investments
Gains or losses realized on the sales of investments are determined based on average cost.
Expenses
Administrative expenses not paid by the Plan are paid by the Company.
3. Debt
Debt consisted of the following at December 31:
| | | | | | | | | | |
| | | 2003 | | 2002 |
| Notes payable in monthly installments to 2009 with interest at 6.07% | | $ | 12,850,763 | | | $ | 17,350,763 | |
| Notes payable to the Company in monthly installments to 2028 with interest at 6.09% | | | 160,975,844 | | | | 163,475,841 | |
| | | $ | 173,826,607 | | | $ | 180,826,604 | |
|
During 1998, notes payable to financial institutions were refinanced, resulting in a reduction in the interest rate, extension of the maturity and a prepayment penalty of $2,831,378, which is being amortized over the remaining term of the debt. Concurrently, notes payable to the Company were restructured, resulting in a reduction in the interest rate and extension of the maturity. Additionally, the Plan borrowed funds from the Company to pay the prepayment penalty.
The scheduled maturities of debt for the next five years are as follows: 2004—$6,900,000; 2005—$7,149,996; 2006—$8,400,000; 2007—$8,300,004 and 2008—$6,680,004.
The number of shares held in the Unallocated Fund is reduced as shares are released to the Stanley Stock Fund pursuant to principal and interest payments. During 2003 and 2002, 453,500 and 472,400, shares, respectively were released and at December 31, 2003 and 2002, 6,711,139 and 7,126,731, shares, respectively are unallocated.
10
Stanley Account Value Plan
Notes to Financial Statements (continued)
3. Debt (Continued)
Payment of the Plan's debt has been guaranteed by the Company. Should the principal and interest due exceed the dividends paid on shares in the Stanley Stock and Unallocated Funds, and employee and Company matching contributions, the Company is responsible for funding such shortfall.
4. Transactions with Parties-in-Interest
As a result of the termination and liquidation of another plan sponsored by the Company, The Stanley Works Retirement Plan ("Retirement Plan"), a portion of the surplus assets of the terminated Retirement Plan was transferred to the Stanley Account Value Plan, effective August 31, 2002, pursuant to Internal Revenue Code Section 4980(d). Such transferred assets that were not used to fund allocations under the Plan in 2002 were credited to a temporary account and, together with any investment earnings thereon, are used to fund certain allocations under the Plan no less rapidly than ratably over each of the six subsequent Plan years. During 2003, $9,246,946 was used to fund 2002 employer Cornerstone contributions. An additional $8,985,351 was allocated for 2003 employer Cornerstone contributions which will be funded in 2004.
Fees paid during 2003 and 2002 for management and other services rendered by parties-in-interest were based on customary and reasonable rates for such services. The majority of such fees were paid by the Plan. Fees paid by the Plan during 2003 and 2002 were $602,767 and $777,268, respectively.
In 1991, the Plan borrowed $180,000,000 from the Company, the proceeds of which were used to purchase 9,696,968 shares of Company stock for the Plan. In 1998, the Plan borrowed $2.8 million from the Company, the proceeds of which were used to pay a prepayment penalty incurred in connection with debt refinancing. The Plan made $12,385,563 and $11,763,175 of principal and interest payments related to such debt in 2003 and 2002, respectively. At December 31, 2003 and 2002, $160,975,844 and $163,475,841, respectively, was outstanding on such debt.
5. Income Tax Status
The Internal Revenue Service has ruled that the Plan and the trust qualify under Sections 401(a) and 401(k) of the Internal Revenue Code (IRC) and are therefore not subject to tax under present income tax law. Once qualified, the Plan is required to operate in accordance with the IRC to maintain its qualification. The Finance and Pension Committee is not aware of any course of action or series of events that have occurred that might adversely affect the Plan's qualified status. An application for an updated IRS determination letter regarding the plan is currently pending.
6. Subsequent Events
Effective with respect to matching allocations that are first credited to a participant's Choice Account as of a date after December 31, 2003, the Plan has been amended to provide that 50% of such matching allocations will be invested in the Stanley Stock Fund and the remaining 50% will be invested according to the participant's directions with respect to his or her own contributions to the Plan.
Effective January 1, 2004, State Street Global Advisors (SSgA) now provides all mutual fund investment options in The Stanley Works Account Value Plan. The change was made to provide a broader range of investment choices in addition to providing continuity to participants with their existing investment selections by replacing previous mutual funds with SSgA equivalents that have similar investment goals and strategies.
7. Reclassifications
Certain prior year balances in the statement of net assets available for benefits and statement of changes in net assets available for benefits have been reclassified to reflect current year presentation.
11
Stanley Account Value Plan
Schedule H, Line 4(i)—Schedule of Assets (Held At End of Year)
EIN-06-0548860
December 31, 2003
| | | | | | | | | | | | | | |
Identity of Issue, Borrower,
or Similar Party | | Description of Investment,
Including Maturity Date,
Rate of Interest,
Par or Maturity Value | | Cost | | Current Value |
| Common Stock: | | | | | | | | | | |
| The Stanley Works* | | 11,886,073 shares of Common
Stock; par value $2.50 per share | | $ | 229,808,450 | | | $ | 450,125,584 | |
| | | | | | | | | | | |
| Citibank, N.A.* | | Short-Term Investment Fund —
Pooled Bank Fund | | | 18,032,041 | | | | 18,032,041 | |
| | | | | | | | | | | |
| Mutual Funds: | | | | | | | | | | |
| NTGI S&P 500 Index Fund | | NTGI S&P 500 Index Fund | | | 13,476,584 | | | | 14,093,364 | |
| | | | | | | | | | | |
Invesco Retirement Trust
Stable Value Fund | | Invesco Retirement Trust | | | 13,320,395 | | | | 13,320,395 | |
| | | | | | | | | | | |
| American Funds Euro Pacific Growth Fund | | Euro Pacific Growth Fund | | | 5,355,587 | | | | 5,774,284 | |
| | | | | | | | | | | |
| Fidelity Small Cap Independence Fund | | Fidelity Select Small Capitalization
Pool | | | 5,499,925 | | | | 6,776,279 | |
| | | | | | | | | | | |
| NTGI Russell 3000 Index Fund | | Russell 3000 Fund | | | 26,887,891 | | | | 30,348,870 | |
| | | | | | | | | | | |
| NTGI Aggregate Bond Index Fund | | Fixed Income Fund | | | 11,663,976 | | | | 13,005,700 | |
| Total investments | | | | | 324,044,849 | | | | 551,476,517 | |
| | | | | | | | | | | |
| Loans to participants* | | Promissory notes at prime rate
with maturities of up to
ten years | | | | | | | 6,587,819 | |
| Total | | | | $ | 324,044,849 | | | $ | 558,064,336 | |
|
*Indicates party-in-interest to the Plan.
12
Stanley Account Value Plan
Schedule H, 4(j)—Schedule of Reportable Transactions
EIN 06-0548860
Year ended December 31, 2003
| | | | | | | | | | | | | | | | | | | | | | |
Identity of Party
Involved | | Purchase Description of
Assets | | Selling Price | | Cost of Asset | | Current Value
of Asset on
Transaction
Date | | Net Gain
(Loss) (1) |
| | | | | | | | | | | | | | | | | | | |
| Category (iii) — Series of transactions in excess of 5 percent of plan assets | |
| | | | | | | | | | | | | | | | | | | |
| Citibank, N.A.* | | Russell 3000 Equity
Index Fund | | | | | | $ | 32,223,784 | | | $ | 32,223,784 | | |
|
(1) Net gain represents gross gain minus transaction costs.
There were no category (i), (ii) or (iv) reportable transactions during 2003.
* Indicates party-in-interest to the Plan.
13
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Stanley Account Value Plan has duly caused this annual report to be signed on its behalf by the undersigned hereto duly authorized.
The Stanley Works Account Value Plan
| | | | | | | | | | |
| Date: June 28, 2004 | | | | | | By: /s/ Mark Mathieu |
| | | | | | | Mark Mathieu
Vice President, Human Resources |
|
Index to Exhibits
| | | | | | |
| Exhibit No. | | Description |
| 23 | | Consent of Independent Auditors |
|
